The start of the week has seen further gains in global share prices, Asian equities are higher, and UK and US stock index futures are also pointing to positive opens later today. At the same time as stocks are rallying, the gold price also reached another record high on Monday morning. The gold price is higher by more than $33 today and is currently trading at $2448 per ounce.

What a week for investors. The Dow Jones reached a record high and closed last week above 40,000, for the first time ever. This is a major bullish signal even though gains for global stocks were fairly modest on Friday, and European stocks closed lower. At the same time as the Dow Jones Industrial Average soared above 40,000, the Vix index, Wall Street’s fear gauge, fell to its lowest level since 2019. While this decline in the Vix is helping to aid positive risk sentiment, history tells us that the Vix does not stay low forever. As we start a new week, some key economic data releases, including FOMC meeting minutes and UK and Japanese inflation data, may determine the timing of shifts in major central banks’ policy stances, which could have a big impact on financial markets. Added to this, we will also be watching closely for any sign that geopolitical tensions will rise after Iran’s President died in a helicopter crash.

There is significance to the Dow Jones closing above 40,000 – it is a broad-based US index and is not influenced by the mega tech names. The top performers in the Dow this year include American Express, Walmart and US banks including Goldman Sachs and JP Morgan. These stocks rely on the US consumer and tend to be cyclical. Interestingly, the market seems to be happy to ignore the recent bad run for US economic data. The Citi Economic Surprise Index for the US fell deeper into negative territory last week, which suggests that there are more downside economic surprises than positive economic surprises. The fact that the US economy seems to be underperforming, yet stock markets are making record highs and the Vix is at a 5 year low, doesn’t add up to us, so we will be watching sentiment indicators closely this week, to see if something has to give in the recent positive run for stock markets.

FOMC minutes: Looking for clues on rate cuts

The economic data highlight in the US this week will be the minutes of the FOMC meeting on May 1st. At that meeting and in the accompanying press conference, Fed chair Jerome Powell, was offered the chance to open the door to near term rate cuts, however, he failed to do take the bait. The Fed remained steadfastly data dependent, and Powell once again urged patience when it came to expectations for cuts.

The Atlanta Fed President said last week that he thinks rate cuts could come late this year, however, as we have pointed out in past notes, the timing of the US Presidential election in November, may impact the Fed’s timing on when to cut rates. If the Fed cuts rates in September, which is the last Fed meeting before the election, then the Fed could come under political scrutiny as a rate cut may be seen as a boost to the Biden campaign. Right now, the market has priced a 50% chance of a September rate cut. There is only a 22% chance of a July rate cut, however, it would be a convenient time to cut rates as it would avoid any accusation of political bias. The market is expecting the first US rate cut to come in December, but if US economic data continues to deteriorate then the Fed may cut sooner. It will be interesting if the potential for a July cut is discussed in the FOMC minutes. If yes, then it could lead to another recalibration of rate cut expectations from the Fed, and it may help to spur another leg higher in the risk rally.

UK inflation data: On the path to 2%

The UK will release inflation data for May on Wednesday. Economists and the Bank of England are expecting a large moderation in the inflation rate. The headline rate of CPI is expected to moderate to 2.1% from 3.2% in March, which is a notch above the BOE’s 2% target rate and would be lower than the Eurozone and US’s inflation rates. The core rate of inflation, which is more important for BOE policy makers, is also expected to moderate to 3.6% from 4.2% in March. Service sector inflation has been particularly sticky in the UK. The market is expecting service sector price growth to slow to 5.4% from 6%, which would be the lowest level since mid-2022. The details of the report, as ever, will be the biggest driver of the market reaction. The decline in headline CPI is expected to be driven by household energy prices, which have fallen sharply due to base effects and the UK’s energy price cap change that was implemented last month. Food and core goods prices are also expected to register YoY declines in price growth. The focus could be on service sector inflation, if it moderates more than expected, then a June rate cut from the BOE could be on the cards. The market is currently pricing in a 54% chance of a rate cut in June, which is higher than expectations for a rate cut in August. A downside surprise in UK CPI could see a further shift in favour of a June cut, which may weigh on sterling and boost UK equities, including the broader FTSE 250 index, which is yet to reach its 2021 all-time peak.

Japanese inflation to impact USD/JPY

The Bank of Japan has spent billions of dollars trying to stabilize the yen after its sharp decline in the past year, however, economic data could do a much cheaper job of boosting the yen. If the FOMC minutes are perceived as dovish then this could weigh on the dollar and help the yen to recover. We also get national inflation data out of Japan on Friday, which may trigger some volatility in the yen. Core CPI is expected to moderate to 2.3% from 2.6% in March. Economists believe that some businesses may be wary of passing on too many price increases due to signs that the Japanese consumer is suffering from the cost-of-living crunch. However, even if we get moderating price pressures, we do not think that this will impact the BOJ’s resolve to normalize policy after its exit from negative interest rates earlier this year. The market is expecting two rate increases from the BOJ this year, with the first one coming in September. While we do not think that the April CPI data will shift the dial on rate hike expectations for the BOJ, the May inflation report might as energy price increases could see the index increase, which may boost expectations for a July hike from the BOJ.

Nvidia results: Big expectations

Although earnings season is winding down, Nvidia, Zoom Video Communications, Lowes, Target and Snowflake all report earnings for the last quarter this week. Nvidia, the AI bellwether, is the key earnings release to watch. The market is expecting another mega earnings report from the GPU maker. Revenues are expected to come in at $24.65bn for last quarter, compared to the previous quarter’s earnings of $22.1bn, this is a big jump. Net income is expected to be $13.9bn, up from $12.8bn in the prior quarter.

As the AI infrastructure build-out continues apace across the globe, we expect Nvidia to remain a cash-printing machine. The issue for Nvidia for these results is that the bar is high, analysts have increased their expectations for revenues and profits in the last 4 weeks, and it has a history of beating expectations. However, will the bar be too high this time? If yes, expect a sell off in the stock price. We have no reason to believe that Nvidia can’t match the current expectations. It is worth noting that in the past 8 quarters of earnings releases, Nvidia’s stock price has moved on average by +8.5% in the 24 hours after the release. Thus, these earnings could be huge news for tech stocks in the second half of this week. 

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